Home prices continue rising: good or bad news?

Home prices continue to rise

As projected, home prices are still on the upswing, and The Standard & Poor’s/Case-Shiller 20-city home price index rose 12.8 percent in August compared to August 2012, marking the best pace of annual increases seen since February 2006.

Case-Shiller also reports that while all 20 cities saw year-over-year price gains, they slowed in various cities for the month, indicating the price spikes may be peaking.

Prices are being driven by a persistently tight supply of homes for sale, and demand remains high, but over the summer, mortgage rates began increasing and unemployment remains problematic. Housing is improving, but it is not without challenges.

A welcome sign overall

Zillow Chief Economist Dr. Stan Humphries said, “The summer-long slowdown in home value appreciation we’ve been observing for months is finally beginning to be reflected even in older Case-Shiller data. This is a welcome sign overall, especially in some of the larger, coastal metros – particularly on the west coast – that dominate the Case-Shiller indices.”

“Several hot markets that were already expensive to begin with were getting too far out over their skis, as rapid home value appreciation and rising mortgage interest rates outpaced income growth and risked causing these markets to become unaffordable,” Dr. Humphries added. “It’s good to see the pace of home value appreciation moderate, allowing the market to get back into a more sustainable balance and not topple over. Home value appreciation is better when it’s boring, and we expect to see continued moderation, even in the still-inflated year-over-year Case-Shiller numbers.”

Challenges remain

This week, the National Association of Realtors (NAR) reported that pending home sales (contracts signed) are still declining, which points to future closings sliding alongside them.

NAR chief economist, Dr. Lawrence Yun said concerns over the government shutdown played a role in a sales slowdown. “Declining housing affordability conditions are likely responsible for the bulk of reduced contract activity,” he said.

Dr. Yun added, “In addition, government and contract workers were on the sidelines with growing insecurity over lawmakers’ inability to agree on a budget. A broader hit on consumer confidence from general uncertainty also curbs major expenditures such as home purchases.”

Yun notes this is the first time in 29 months that pending home sales weren’t above year-ago levels. “This tells us to expect lower home sales for the fourth quarter, with a flat trend going into 2014. Even so, ongoing inventory shortages will continue to lift home prices, though at a slower single-digit growth rate next year.”

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Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.